Hedging a Stock Porfolio with Futures

Résumé de l'exposé

In the following development, basic portfolio management is explained. First, through questions, and in the second part, through a three-shares-composed portfolio. I will use indices futures, and equity futures. Equity futures functioning is the same as other classical futures such as indices futures or commodities futures. For each equity futures, there is a specific initial margin and a specific maintenance margin.

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Sommaire de l'exposé

Basic portfolio management

Explaination through questions

Explaination through a three-shares-composed portfolio.

Extraits de l'exposé

[...] The dividends schedule is slightly different between the whole index (and therefore its future contract) and the three assets that compose my portfolio. As we know the importance of the dividend yield in the futures contract pricing, it could entail some gaps in the hedge, and oblige me to adjust my hedge quite often. Is the historic beta reliable? We can wonder if it is reliable because past do not forecast future. Therefore, the hedge efficiency is closely linked to the beta used by the investor. - Huge initial investment required compared to futures initial margin. [...]

[...] In the event of the third Friday not being a business day, the Last Trading Day shall normally be the last business day preceding the third Friday First business day following the Last Trading Day 08.00 17.30 London time, Last Trading Day 08.00 16.30 London time Universal Stock Futures Contract (Cash Settlement) List of contract details in respect of London Stock Exchange shares (08/09/05) Last update 07/05/04 The third hedging solution is to deal with FTSE 100 tracker. In order to hedge my whole portfolio, I have to sell for the same amount of FTSE 100 tracker adjusted by the beta. Advantages: no imperfect hedge due to maturity difference Disavantages: it is very difficult to obtain a perfect hedge, due to the differences between my portfolio reactions and the FTSE 100 evolution. [...]

[...] Therefore, the hedge efficiency is closely linked to the beta used by the investor. Weighted Average Beta of the Portfolio (relative to the whole assets) 1.65 x 50% + 1.04 x 30% + 1.26 x 20% = 1.389 Relative to FTSE 100 (which beta is 0.98 ) = 1.389 / 0.98 = 1.4173 Contract details FTSE 100 index futures Unit of Trading Delivery Months Quotation Minimum Price Movement (Tick Size & Value) Last Trading Day Delivery Day Trading Hours Contract Valued at per index point March, June, September, December (nearest four available for trading) Index points 0.5 5.00 ) 10:30:30 Third Friday in delivery month1 First business day after the Last Trading Day 08:00 - 17: - In the event of the third Friday not being a business day, the Last Trading Day shall normally be the last business day preceding the third Friday. [...]